Question

The interest rate charged to AAA corporate borrowers is 7.8% for 5 year bonds. The interest rate charged to BBB corporate borrowers is 8.8% for five year bonds. The onferences between these two rates of interest can best be explained by the following factors.
a. Inflation and Maturity Risk
b. Maturity Risk and Default Risk
c. Default Risk and Liquidity Risk
d. Liquidity Risk and Inflation me. Inflation and Default Risk

Answer 1

Answer:

Answer is option c.

Default Risk and Liquidity Risk

Explanation:

• Default risk - because AAA and BBB differ in credit quality
• Liquidity risk - because BBB could potentially have lower liquidity than AAA bond (more stable and could be more traded)